JOHN BOGLE: Asset Management Has Become An Extractive Industry

Just as Warren Buffett is the walking embodiment of
value investing, John Bogle is index-investing incarnate. Founder
and former CEO of the Vanguard Group, Bogle has spent decades
preaching the virtues of the low-cost index funds he helped
pioneer nearly 40 years ago.

Alas, the last half of Bogle's 60-year career has been marked by
the rise of casino finance and a Masters of the Universe ethos
that has infected the once-staid world of asset management.
Bogle's new book, The Clash of the Cultures, laments the
crowding out of investing by speculation, a development that has
enriched fund managers but left lots of households backfilling
their 401(k)s.

Even before the crash of 2008, the asset-management industry had
become (arguably) a self-serving enterprise, sucking up excessive
management fees in exchange for the promise of performance that,
in the long run, it is mathematically certain not to achieve.
Part of Clash dwells helpfully on concept of "mean reversion,"
key to understanding why most attempts to "generate alpha," as
the industry calls beating the market, are ultimately futile.
Hint: It's roughly the same reason that the house always wins.

We spoke with Bogle recently about his new book and about
investing more broadly. An edited transcript:

The rise of speculation and short-termism in asset
management seems to have paralleled similar developments
throughout finance. Is there a link, or am I conflating disparate
ideas?

No, you're right in both cases. The asset-management business, on
the mutual-fund side, is an asset-gathering business. Managers
want to maximize their revenues. And that means that salesmanship
takes the front seat and stewardship takes the back seat. Both
are still there, as I say in the book. But we used to be a
profession with elements of business, and now we're a business
with elements of professionalism. I think it's a very bad change
for the investor.

What in particular has changed the nature of asset
management?

When you go from being a little cottage, mom-and-pop industry to
being in essence the largest financial institution in
America—more assets even than the banks—everything changes. Your
focus changes, your objectives change—and that's really the
underlying cause of this. The mutual fund is an excellent,
outstanding investment idea, but the bigger it gets, the more
[fund companies] start to think about the marketing front. You
start thinking about your competitors instead of yourself. When
market share is the goal—I call it in the book "the Great God
Market Share"—you've gone in the wrong direction. So, part of
it's just plain getting big.

Think of the difference between running a mutual fund—that's your
profession—and all of a sudden you're running as many as 350
mutual funds. When I started in this business, this was a
one-fund business, pretty much, or perhaps a two-fund
business—you might have a balanced fund and a stock fund. That's
all there was. Now we've subdivided components, all for marketing
reasons. There's no reason to think anybody can pick the best
sectors of the market in advance.

Given the ratio of fees to performance, is it too harsh
to say that the asset-management business is largely a
rent-seeking business?

No, that's not too strong a statement. It's exactly what we are:
We're extracting rents from society at large and basically
shifting them from investors to money managers, brokers,
marketers, administrators, accountants. And all that is rather
unnecessary. An index fund really doesn't have to do much, and,
equally important, the investor doesn't have to do much. The
investor who just buys and holds the index fund forever will do
fine. I occasionally get letters from a handful of people who
bought [the Vanguard 500 Index fund (symbol: VFINX)] at the
initial offering, saying "It's unbelievable! It works!"